Better Buy: Amazon vs. Netflix

In the age of low interest rates and technological change, disruptive growth stocks have reigned supreme. Two of the best-performing tech market leaders in the past few years have been Amazon(NASDAQ:AMZN) and Netflix(NASDAQ:NFLX). As you can see, both stocks have absolutely trounced the broader market, nearly quadrupling over the past five years, versus just a 66% gain for the S&P 500.

If you’re thinking of putting new investment dollars behind one of these two leaders, you might think that you’ve missed the boat. But remember, you could have also said that four years ago…or three years ago…or two years ago…or last year. In general, high-quality companies with excellent products and managements keep on winning, so let’s investigate which of these two stocks is the better bet today.

The case for Netflix

Netflix is far and away the leader in over-the-top streaming television. In fact, Netflix pioneered the streaming revolution. Though it began as a mail-order DVD subscription service in 1997, CEO Reed Hastings saw the future of internet television early on — certainly earlier than legacy network and cable television companies that were quite comfortable with the traditional cable model.

Netflix began its streaming service in 2007 — the same year that the iPhone came out. At first, the offering was mostly second-rate films and television shows, but Netflix gradually improved the service every year as it gained more and more subscribers.

2013 marked a pivotal year, when Netflix released its first large-scale original series, House of Cards starring Kevin Spacey. After analyzing data showing that a large number of people who liked Kevin Spacey movies also enjoyed the original British House of Cards, Netflix put a big budget and major film director David Fincher behind the new venture.

The data-plus-hiring-top-talent recipe worked like a charm, and Netflix hasn’t looked back since. Every year, Netflix ramped up its original content spending, piling up subscribers and attracting top talent. Netflix was also a visionary in terms of targeting international markets, which now make up a majority of its subscriber base. As of last quarter, Netflix had amassed 149 million global streaming subscribers — good for a stunning 25.2% year-over-year growth, even though Netflix is already the largest global streaming service. Not only has Netflix been able to grow subscribers, but it has also raised prices several times in the past few years without very much in the way of churn. That shows tremendous pricing power.

Some reasons for caution

Though Netflix has a tremendous lead in subscribers, it has poured basically all of that subscriber revenue into more and more content and marketing. Though the company has been posting profits on a generally accepted accounting principles (GAAP) basis, Netflix has also spent far more on new self-funded original series. Last quarter, management revealed that it will now have negative $3.5 billion in free cash flow in 2019, revised upward from its negative $3 billion target at the start of the year. Just recently, The Information reported that Netflix content head Ted Sarandos told several company executives that Netflix will need to become more efficient with its content spending going forward.

Competition is also coming online soon. After a slew of industry mergers, large media companies have gotten their acts together on streaming and are just now beginning to launch their own services — often taking content they previously sold to Netflix with them.

For instance, Netflix has been able to stream Disney(NYSE:DIS) movies over the past few years, but Disney didn’t renew that deal, instead opting to launch its own Disney+ streaming service, coming in November for just $6.99 per month — nearly half the price of Netflix. Disney is also now in control of Hulu and thus may be able to bundle both services to attract a broader streaming customer base.

However, the market doesn’t appear to be too worried about these competitive threats at the moment. Netflix is currently valued at $166 billion, and the stock trades for a lofty 135 PE ratio and a whopping 65 times next year’s earnings.

The case for Amazon

Most people are very aware of Amazon, though you might not be aware of just how deep Amazon’s reach is. Founded in 1994 by visionary leader Jeff Bezos, Amazon began as an online bookseller, one of the first businesses to sell goods via a new invention called “the internet.” Since then, Amazon has…